Thrift Savings Plan ineligible rollover

Earlier this year we received a request for a direct rollover to a Thrift Savings Plan. Apparently the client is now finding out that he made a non-deductible contribution to the IRA last year and informed the Thrift Savings Plan administrator. The Thrift Savings Plan administrator wants us, the former IRA Custodian, to send them a letter stating that we sent them an ineligible rollover that must be returned to us, and that we indemnify the Thrift Savings Plan of any claims regarding the transaction.

I want to know if I am being unreasonable in my reaction to this request. As an IRA Custodian, we do not determine the eligibility of our clients to make IRA contributions, nor do we determine the deductibility of any contributions. We also do not determine the eligibility of any rollovers that occur after funds are withdrawn from an IRA held by us. It seems pretty out of line to me for this administrator to demand that we act as if we have determined that the rollover to their Thrift Savings Plan contained an ineligible portion and that we want these funds to come back to us. The portion of the rollover that is being claimed, by the individual, to not be eligible for rollover is well below our minimum opening balance requirements. It seems that the Thrift Savings Plan administrator is trying to push off the headache of both reporting the withdrawl of a non-deductible IRA contribution as a deemed excess, and the rollover of an ineligible non-deductible contribution to a Thrift Savings Plan.



I spoke with a TSP representative and they insist there are no provisions for correcting an ineligible rollover, other than receiving a letter from the previous IRA Custodian informing them of the ineligible rollover and requesting the funds be returned. They would then remove the funds from the TSP as an administrative error with no reporting being generated. This just doesn’t sound right. How are they going to match the amount they will list on the 5498 with the 1099-R from the IRA? Are they going to alter their 5498 to show an amount less then they actually received was rolled over? Do they expect us to alter our 1099-R to show an amount less than what we actually withdrew from the account?

I’m now trying to find information on TSP corrections because it is difficult for me to believe there is no guidance for how to remove an ineligible rollover besides “let’s sweep this under the rug.”



I agree the indemnification request is out of line and an IRA custodian will never have knowledge of a taxpayer’s IRA basis. This is why many plans only accept IRA rollovers from rollover IRAs, although since 2002 that is no longer assurance that they don’t get after tax dollars either.

I do not know what provisions exist in plan corrective procedures (eg EPCRS) to fix this, but it is apparently a serious problem for compliance officers. If anyone is at fault it is the employee, who is the only party that has the info at all time to know what basis their IRA has, and deduct it from the balance. I think the first question the TSP should have is whether the taxpayer has any other IRAs. TSP staff may think that basis sticks with the account like it does for DC plans but for IRAs it does not. The first dollars of any IRA transfer to a QRP are deemed to be the pre tax balance over all the owned IRA accounts, so if this taxpayer has just one more TIRA with a pre tax balance, it may well be enough to eliminate their problem without further action. The taxpayer may also not realize that their basis is not attached to any specific account they may have rolled over.

As for QRPs, they do not issue 5498 forms and may explain why Pub 590, p 25 requests a taxpayer statement explaining any IRA rollovers to QRPs. As for your 1099R, I think you WOULD have to either revise it to reflect funds that were returned to you or issue a 5498 for them.

A few months ago I scanned through EPCRS searching for the fix to this problem, but could not find one there. If you locate anything let us know….and of course the TSP.



I told the TSP administrator that we could send a direct rollover request and any funds received would be coded as a rollover. It never occurred to me to ask about any other IRA accounts this client may have which may resolve this problem. Thanks!

I’m still going to look into this because it’s hard to believe it was never even considered that a TSP may receive an ineligible rollover. What happens with a 401K that receives an excess contribution?



Receiving basis from an IRA creates the same problem for a 401k, 403b or 457 as it does for the TSP, which is just the federal govt 401k plan in most respects. If there were a published corrective procedure it should apply equally to all these plans.

But it is a different problem for these plans than an excess contribution, excess annual addition or excess deferral and there are all kinds of regs published to address those issues. I have even heard that getting IRA basis could cause a plan to be disqualified, but I doubt if that has ever happened. There must be some corrective procedure without the massive problems of disqualification, which would punish many innocent employees. I just don’t know what it is or whether the TSP in your situation is gerrymandering a solution or not. Their solution might work if you chose to play ball with them, but the fact that they tried to hold you responsible suggests that they do not know the correct fix if there is one, because it certainly would not include trying to get an IRA custodian to accept responsibility for the error.

Just FYI: A QRP CAN accept after tax dollars directly transferred from another QRP if they agree to track the amount of after tax contributions, but they do not have to accept them. That’s because each plan must closely track it’s own after tax contribution amounts, and in that case errors probably can be passed back to the responsible plan. The TSP here may not realize how IRAs differ from other QRPs in this respect.



The client does have other IRA accounts with more than enough basis to cover the non-deductible contribution he made into the account that was rolled over to the TSP. I’m relieved that we have sidestepped the issue of how to properly correct an ineligible rollover to the TSP, at least as far as it saves the client from a correction headache, but I don’t think I’m going to be satisfied until I know what the proper corrective action should have been. We have done many direct rollovers to TSPs in the past year and I want to be prepared if we come across a situation where we don’t have an easy alternative resolution.



Has there been any update to corrective actions for getting basis back out of TSP? -m



There has been partial guidance in RR 2014-9. The employer plan is relieved of serious consequences from accepting IRA basis by simply distributing the basis plus allocated earnings back to the employee. However, the resulting tax implications to the employee was not addressed in this RR. The other thread includes my opinion on the reporting implications, both for the partially failed rollover to the employer plan and for the distribution back out of the employer plan.



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